Chapter 5, Problem 38P:

Towerton Financial Services, a brokerage firm, started with a focus

on stock trading and mutual funds. As the business grew, Towerton diversified into two new

product lines, investment account management and financial planning. Although revenue has

grown with the new product lines, Towertons management is disappointed with the firms

profitability. (See Exhibit 5-10 for the most recent monthly income statement, which is typical

for the company.)

Towertons three groups of professional staff deal directly with customers across the four

product and service lines. Brokers execute stock trades and mutual fund transactions and pro-

vide advice and recommendations. However, Towertons brokerage customers make their own

decisions about buying and selling. Towerton charges a flat fee per stock trade that depends on

the total amount of assets a customer has on deposit with the company. Last month, these fees

averaged $8.80 per transaction. For mutual fund transactions, Towerton charges 1.5% of the

value of the mutual fund shares purchased. This fee averaged $41.45 per mutual fund transac-

tion last month. There is no charge when customers later sell their shares.

Investment account managers actively manage customers investments by buying and sell-

ing stocks to meet customer objectives. These managers meet initially with customers to learn

about their investment goals, interests, and risk tolerance. Thereafter, the parties meet quarterly

to review account performance and investment strategy. Towerton charges each customer an

annual asset management fee of 1.5% of the customers assets under management.

Financial planners prepare financial plans for customers. The planners help customers

develop a budget and determine how much to save and how much insurance to purchase.

Towerton charges $1,200 for the first financial plan and $125 per hour thereafter for ongoing

advice. Planners typically meet quarterly with customers to discuss any needed changes in plan

changes.

Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,024

Professional staff

Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,246

Account managers . . . . . . . . . . . . . . . . . . . . . . 136

Financial planners. . . . . . . . . . . . . . . . . . . . . . . 141

Support personnel

Principals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325

Customer service representatives . . . . . . . . . . 146

Space . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300

Computer server expenses . . . . . . . . . . . . . . . . . 241

Other IT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

Total costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,704

Margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,320

Margin % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.8%

SG&A (unallocated corporate expenses) . . . . . . . 1,300

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . 20

Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . 0.5%

Source: Robert S. Kaplan.

Among the support personnel, principals manage and supervise brokers, investment

account managers, and financial planners. Customer service representatives handle customer

requests over the telephone for sales and account services.

Towerton uses two types of computer equipment: servers and desktop computers. Serv-

ers, in centralized clusters, process customer transactions, maintain customer accounts, and

perform various administrative functions. Server capacity is measured in millions of computer

instructions processed (MIPS). Towerton also leases a desktop computer for every employee.

Towertons remaining expenses include office space rental and miscellaneous corporate

expenses. Office space consists of individual offices for each of the professional staff and sup-

port personnel, as well as conference rooms for face-to-face meetings with customers to open

accounts or service existing accounts. Miscellaneous expenses include administrative expenses

for finance, human resources, audits, taxes, professional fees, and compliance.

Because of managements concern about the companys profitability, Towertons accoun-

tants have gathered the following information:

1. After taking into account weekends, holidays, and vacations, the professional staff and

support personnel work about 20 days per month on average.

2. Brokers, account managers, financial planners, and principals show up for 8 hours of work

per day but spend an average of 1.5 hours per day on breaks, training, education, and pro-

fessional activities, with the remaining workday spent interacting with customers.

3. Like the other personnel, customer service representatives show up for 8 hours of work per

day but spend an average of 1 hour per day on breaks, training, and education.

4. Each server costs $3,168 per month and operates 24 hours per day for 22 days each month.

The cost per server hour is therefore $6. The server processing capacity is 50 MIPS per

hour. Peak server usage occurs for 8 hours each day; during these hours, all 76 servers are

operated. During nonpeak hours, only 19 of the servers are operated. Towerton has com-

puted the cost per MIPS as $0.12 for nonpeak hours and $0.30 for peak hours.

5. The costs per month in Exhibit 5-11 include compensation, fringe benefits, and the costs

of space assigned on the basis of square feet of space occupied and individual IT resources

used for other than for customer-related activities